Israel Leverages Local R&D for Overseas Buys

Nov. 12, 2012 - 12:15PM
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TEL AVIV — The $3.1 billion Israel receives in annual U.S. military aid, plus hundreds of millions more in U.S. funding for cooperative missile defense programs, guarantees that Washington’s special partner in Jerusalem will remain a hot market for American defense firms for years to come.

Under U.S. law, Israel must spend 73.7 percent of congressionally appropriated foreign military financing (FMF) funding in the United States. At $1.5 billion, this represents about 20 percent of Israel’s overall defense budget and some 60 percent of modernization funding.

The Lockheed Martin F-35 Joint Strike Fighter leads the big-ticket programs funded by annual FMF, followed by ongoing purchases of the firm’s C-130J and a recently inked $735 million contract for Honeywell engines used to power Israel’s new fleet of Alenia Aermacchi M-346 trainer jets.

But Israel also is allowed to convert the remaining third of its annual FMF into shekels for domestic modernization spending, and officials and experts here say a growing amount of U.S.-origin funding is making its way back to the U.S. market once locally developed systems are ready for production.

The latest example of FMF flowback to the U.S. market is the Israeli Namer, a heavy troop carrier based on the hull and other components of the indigenously developed and produced Merkava Mk4 main battle tank. Under a contract to be funded by U.S. FMF aid, General Dynamics Land Systems will produce hulls and materiel kit sets for up to 600 Namers over the next eight years at its Lima, Ohio, facility.

The bulk of early development funding for this mega project came from so-called Offshore Procurement (OSP), the portion of annual aid that Israel was allowed to convert into local shekels for modernization projects.

The Color of Money

In Israel, the distinction between direct FMF funds to be spent in the United States — so-called green dollars — and OSP aid convertible into shekels is known as the color of money, with the latter coined blue-and-white dollars after the colors of the Israeli flag.

And while the color of money has long influenced Israel’s program, planning and budgeting process, government and industry are becoming increasingly adept at leveraging the investment of blue-and-white development dollars into U.S.-based procurement programs financed through direct FMF green dollars.

Government officials and industry executives cite Israel’s Tzayad Digital Army Program (DAP), developed by Elbit Systems, as a classic example of FMF flowback to the benefit of Israeli and U.S. industry. Over the past decade, Israel has spent billions of shekels on this centerpiece program to connect all elements of Israel’s ground forces and other service branches into a single, secure C4I network.

Multiyear plans through 2017 call for investing several hundred million more shekels in DAP-related development, but actual production will take place at Elbit USA, Elbit’s wholly owned U.S. subsidiary employing hundreds of U.S. citizens and subject to U.S. laws. Funding for mass production of multiple elements of Israel’s DAP network will come from direct FMF, or green dollars.

Plan Oz

Israel’s upcoming 2013-2017 spending plan, dubbed Plan Oz, was approved in early September but remains on hold due to protracted budget disputes unlikely to be resolved until after Israeli elections scheduled for Jan. 22.

Nevertheless, military officers here point to a considerable increase in funding earmarked for local development of sensors, munitions and unmanned systems that can be transitioned to FMF-funded U.S.-based production.

“A large focus of the [Israel Defense Forces] Ground Forces’ force buildup goals … is augmenting primary platforms with an emphasis on the continued integration of the Merkava tank and the Namer APC,” Israel’s military spokesman told Defense News.

In parallel, Israel plans to expand procurement of the locally developed Trophy active protection system for armor and the Iron Dome active defense system against rockets and short-range missiles. Both systems are developed and produced by Rafael.